New Orders and Asset Prices

This paper investigates the asset pricing and macroeconomic implications of the ratio of new orders (NO) to shipments (S) of durable goods. NO/S is a measure of investment commitments by firms, and high values of NO/S are associated with a business cycle peak. High NO/S predicts a short-run increase in output, mainly from equipment and inventory investment, but a dramatic long-run decline in fixed investment, inventories, and GDP growth. We find that NO/S proxies for a short-horizon component of risk premia that is not captured by the predictive variables identified in prior work. Higher levels of NO/S forecast lower excess returns on a broad set of assets, including equities, long- and intermediate-term Treasury bonds, and highand low-grade corporate bonds, at horizons from one month to one year. For stocks, and to some extent for bonds, these effects are robust to the inclusion of common return predictors. For all assets, predictability is significant on an out-of-sample basis as well. We also address the term structure of risk premia. To measure longer term investment commitment, we construct a similar ratio based on construction starts and show that it proxies for long term risk premia, predicting stock and bond returns primarily at longer horizons